Make sure it lasts a life­time

Avoid a short­fall in your re­tire­ment funds with these strate­gies to en­sure the money doesn’t run out be­fore you do

The Western Star - - FINANCES | LIFE -

IT’S one of those fi­nan­cial night­mares we all hope doesn’t come true – run­ning out of money in re­tire­ment.

Out­liv­ing your wealth adds an un­wel­come level of stress at a time when you’re fi­nan­cially vul­ner­a­ble. With­out a reg­u­lar in­come stream from a wage, and limited em­ploy­ment op­por­tu­ni­ties, it is near im­pos­si­ble to re­build.

Here are our top seven strate­gies to en­sure your wealth lasts a life­time ... or longer.

1 PLAN, PLAN AND PLAN

The first step is to un­der­stand the threat, think about it, and plan on avoid­ing it. One of the big­gest mis­takes peo­ple make is to leave it too long to un­der­stand run­ning out of money is a real pos­si­bil­ity.

The ear­lier you un­der­stand the threat, and plan for it, the eas­ier it will be to avoid be­cause you have time on your side. Through the magic of com­pound­ing re­turns (earn­ing a re­turn on pre­vi­ous re­turns/ in­ter­est on in­ter­est) your wealth can grow enor­mously by mak­ing lit­tle reg­u­lar ad­di­tions over the long term.

It could be mak­ing a habit of adding your tax re­fund, work bonus or other wind­falls to ex­tra su­per­an­nu­a­tion con­tri­bu­tions each year.

2 HOW MUCH WILL I NEED TO RE­TIRE WITH?

Again, the ear­lier you work this out the bet­ter be­cause it is the key plank of the plan­ning process. Your su­per­an­nu­a­tion or bank web­sites have re­tire­ment cal­cu­la­tors where you punch in what you think you’ll need in in­come and up comes a re­tire­ment to­tal.

A word of warn­ing here. It’s our ex­pe­ri­ence that most Aussies se­ri­ously un­der­es­ti­mate their re­tire­ment in­come needs and the costs they’ll in­cur. So be con­ser­va­tive.

Work out how long you’ll be re­tired, an ap­prox­i­mate cost bud­get and do the maths. Re­mem­ber the travel bud­get of most re­tirees blows out in the early years as does the health bud­get in the lat­ter years of re­tire­ment.

A gen­eral rule of thumb from the ex­perts is to plan a bud­get at around 85 per cent of your pre-re­tire­ment in­come. As­sume so­cial se­cu­rity sup­port as a back-up safety net, rather than a cen­tral plank of re­tire­ment fund­ing, be­cause it will be in­creas­ingly dif­fi­cult to be el­i­gi­ble for the age pen­sion.

3 CON­STANTLY RE­VIEW YOUR RE­TIRE­MENT IN­VEST­MENTS

By constant, we mean ev­ery 6-12 months, not ev­ery week. Most aver­age Aus­tralians in­vest in their home, their su­per and a port­fo­lio of blue-chip shares ei­ther di­rectly or through man­aged funds. A sort of “set and for­get” strat­egy.

We agree with the “set” bit, but not the “for­get”. Reg­u­larly mon­i­tor­ing the performance of your in­vest­ments, against com­pa­ra­ble al­ter­na­tives, and the fees be­ing charged is ab­so­lutely es­sen­tial.

Don’t con­stantly chop and change but be aware of un­der­per­form­ers that drag down re­turns which, be­cause of com­pound­ing, will be mag­ni­fied over time and hit your re­tire­ment pay­out hard.

Also check the skew of your su­per­an­nu­a­tion de­pend­ing on age and time to re­tire­ment.

4 HAVE A PLAN FOR TAK­ING MONEY OUT OF SU­PER­AN­NU­A­TION

A tran­si­tion to re­tire­ment strat­egy needs care­ful plan­ning and pro­fes­sional ad­vice.

Ev­ery­one is dif­fer­ent, so a tai­lored plan re­flect­ing su­per­an­nu­a­tion bal­ances, out­side su­per in­vest­ments, debt lev­els, spend­ing habits and fu­ture goals is crit­i­cal.

Is­sues like early re­tire­ment ex­penses (travel etc) and the bal­ance be­tween a lump-sum pay­ment and pen­sion in­come stream are im­por­tant de­ci­sions. There can be huge tax con­se­quences as well if the right de­ci­sions aren’t made.

5 PRE­PARE FOR SUDDEN FI­NAN­CIAL SHOCKS

They can come in all shapes and sizes – ev­ery­thing from los­ing a job or in­cur­ring a long ill­ness to major car re­pairs and re­plac­ing the fridge. But an un­ex­pected fi­nan­cial event can have a dev­as­tat­ing im­pact on your wealth build­ing plans.

Apart from ap­pro­pri­ate in­sur­ance cover, a lot of ex­perts sug­gest putting aside six months worth of salary to counter un­ex­pected fi­nan­cial shocks. Put this amount in your in­vest­ment port­fo­lio or in the re­draw fa­cil­ity of the home loan so that it is al­ways earn­ing a re­turn while not be­ing used.

6 WATCH SPEND­ING AND CON­SIDER DOWNSIZING

With wage rises sub­dued, it has never been more im­por­tant to live within your means. Re­mem­ber it’s the sur­plus in­come af­ter ex­penses which is used to in­vest and build wealth. The more you watch your spend­ing the more that’s left over to put to work on your fu­ture fi­nan­cial se­cu­rity.

As you move out of that high ex­pense rais­ing a fam­ily era, downsizing as­sets (house, car etc) and ex­penses can make a mas­sive dif­fer­ence. So do it sooner rather than later.

7 THINK CARE­FULLY BE­FORE GIV­ING TO CHIL­DREN

Done prop­erly, get­ting ac­cess to su­per­an­nu­a­tion on re­tire­ment can be the big­gest wind­fall most Aus­tralians will ever ex­pe­ri­ence. The pay­out can be huge and many of­ten make the mis­take of think­ing “that’s more than I’ll ever need” and start look­ing to help adult kids out with fi­nan­cial gifts.

It is a mis­take be­cause you can never be quite sure whether that huge wind­fall will in­deed be enough. Those un­ex­pected fi­nan­cial shocks can come from any­where. So be care­ful with gifts to any­one.

Il­lus­tra­tion: JOHN TIEDEMANN

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